Lecture7b.ppt

Lecture7b.ppt - Lecture7:PersonalIncome Taxes:Overview...

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    Lecture 7:  Personal Income  Taxes:  Overview
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    Outline of lecture Traditional notion of a comprehensive income tax Inconsistencies in tax treatment of labor income Inconsistencies in tax treatment of capital income Debates about allowable deductions and credits
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    Definition of Comprehensive Income Conceptual legal underpinning of the current income tax base Proposed by two academics, Haig and Simons, in the early 20 th century They argued that people should be taxed on the amount they could consume each year while holding their real assets unchanged
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    Formal definition Annual budget constraint: Holding real assets fixed implies: So proposed tax base equals labor income plus capital income accrued during the year Influence still seen in current tax base t t t t t A C L r A + = + + - ) 1 ( 1 1 - + = t t t pot t A r L C
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    Implications for the choice of tax  base Recommended tax base equals labor income plus capital income so wage and non-wage income to labor, plus dividends, interest income, capital gains income, plus any income in kind from savings Recommendation is that the tax rate should be the same, regardless of the composition of income among these different categories
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    Actual tax base Wage and salary income, income from self- employment, value of pay in kind Interest income Separate lower tax rate on dividend income Separate lower tax rate on realized capital gains Sum is adjusted gross income (AGI) Subtract exemptions and either standard or itemized deductions to yield taxable income Calculate tax payments based on taxable income and then subtract various credits
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    Possible rationale Protect tax base against possible reclassifications of income between wages,
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This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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Lecture7b.ppt - Lecture7:PersonalIncome Taxes:Overview...

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